Helping Nonprofits Police Themselves: What Trust Law Can Teach Us About Conflicts of Interest

20 Pages Posted: 19 Jul 2010

See all articles by Melanie B. Leslie

Melanie B. Leslie

Yeshiva University - Benjamin N. Cardozo School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2010


Fiduciary duty law seeks to minimize agency costs that occur when the interests of the agent and principal diverge. That law is context specific: the substance depends upon the objectives of the fiduciary relationship and the degree to which other forces, such as markets and social norms, help align the incentives of principal and fiduciary.

Trust law has no business judgment rule, and prohibits even "fair" conflict of interest transactions unless they are approved by fully informed beneficiaries. Strict rules bolster norms against self-dealing and compensate for trust beneficiaries’ poor monitoring abilities and inability to exit or diversify. Corporate fiduciary duty law is more relaxed, and does not require the board to obtain advance approval prior to engaging in "fair" transactions with board members. The standard is more generous because diversified shareholders want to encourage risk, and because market forces pressure corporate directors to avoid conflicts that are not in the corporation’s best interests.

Neither monitors nor markets exert meaningful pressure on nonprofit fiduciaries. When nonprofit corporations function effectively it is because the most vocal directors have internalized fiduciary duties as social norms. Fiduciary duty law in the nonprofit context should therefore seek to support and reinforce fiduciary duties as social norms.

Trust law teaches that clear rules are superior tools for generating and supporting social norms. That lesson has been lost on policy makers, who have transplanted fuzzy corporate law fiduciary duty standards to the nonprofit context. The result has been the erosion of the fiduciary duty of loyalty.

Keywords: Agency Costs, Monitoring, Groupthink, Boards, Conflicts of Interest, Fiduciary Duty, Duty of Loyalty, Self-Dealing, Nonprofit Corporations

Suggested Citation

Leslie, Melanie B., Helping Nonprofits Police Themselves: What Trust Law Can Teach Us About Conflicts of Interest (April 26, 2010). Chicago-Kent Law Review, Vol. 85, No. 2, p. 551, 2010, Cardozo Legal Studies Research Paper No. 304, Available at SSRN:

Melanie B. Leslie (Contact Author)

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

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